Important Tips for Managing 401k Fees

If you are contributing to a 401k or you are eligible to receive employer contributions to a 401k account, it’s important to educate yourself on the types of fees involved. Many 401k plans are subject to several types of fees, including investment management fees, trust custody fees and administrative fees. You can’t avoid paying these because they are taken right out of your account, but you can find ways to offset some of the fees and costs.

If you are participating in an employer-paid 401k plan, your employer will usually absorb the cost of administrative fees because these fees are imposed to manage and maintain your account. Here are some important tips for managing your 401k fees:

1. Monitor fees when you leave your job. If you do end up leaving your company that made contributions to your 401k plan, make sure you know who is responsible for paying the administrative fees going forward. Most companies will not pay for administrative fees when the employee leaves their job, so you will end up paying a little extra in order to maintain your account.

2. Take a close look at investment fees. Investment fees are the biggest component of most 401k plans and are deducted from your investment returns. Your account may be subject to sales charges or sales “loads” and commissions that are paid out based on the number of shares bought and sold on the account. Other investment fees include front-end load and back-end load fees, Rule 12b-1 fees (usually imposed on mutual funds), target date retirement fund fees, collective investment fund fees and charges on variable annuities. Make sure you have a good understanding of what these fees are and consider shopping around for lower rates to get the most return on your investment.

3. Review your account statements thoroughly. All of the fees and a breakdown of all fees on each account will be posted on your account statement. Take a close look at the paperwork you receive in the mail or online so that you are aware of the total fees you are paying each month and year. Remember that there are a number of different factors that can impact fees and expenses of your 401k plan. You could be eligible to receive lower fees if you have more assets. Costs can be subsidized if your 401k plan and other services are offered through a bundled program.

Taking some time to learn about 401k fees can help you make some wise investment decisions. Use these tips to manage your 401k plans better and ensure you are getting the highest possible return from your investments.

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5 Steps to a Healthy 401(k) Plan

401(k) plans offer a number of benefits and can help you build up that all-important savings cushion you need for retirement. If your employer is contributing to your 401(k) and you are being consistent with your own contributions, you can build up a healthy savings account and look forward to a comfortable, stress-free retirement.

However, there are several things you need to do to make sure your 401(k) account stays healthy. Here are just five steps to a healthy 401(k) plan:

1. Be aware of your rights. You can start contributing to your 401(k) plan after one year of being with your employer. Take some time to learn about your rights as an employee and the benefits you are eligible to receive after one year of employment.

2. Automate your 401(k). Set up an automatic transfer of your contribution after each paycheck so that you don’t have to take the extra steps to make an actual deposit into the account. Automating your contributions can make it much easier to just “set it and forget it”. You’ll be able to build up that 401(k) account without having to think about it each time you receive your paycheck.

3. Take advantage of employer-matching. Check with your employer’s HR department to learn about your benefits and find out if you are eligible to receive an employer match for all contributions. Many corporations and some small business owners do match employee contributions, and this can be a great benefit for you in the long-run. Remember that these contributions are completely tax free, so you are essentially getting a “tax free raise”.

4. Don’t borrow from your 401(k) when you’re strapped for cash. If you’re running low on funds and need cash fast, don’t borrow from your 401(k) account. You will be paying a price for taking out this loan and will have to pay a penalty for withdrawing from the account. If you do end up leaving your job that is paying for some of your 401(k), you will have to pay the penalty and taxes on the withdrawal, unless you repay the entire amount in full.

5. Contribute up to the maximum amount whenever possible. You are permitted to contribute a certain amount each year and the IRS adjusts this limit on a regular basis. Make sure you know what this amount is so that you are contributing up to this amount year after year. Remember that none of those dollars will be taxed, so it is in your best interest to contribute as much as possible up to the contribution limit.

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Tips for Keeping Your 401K on Track

Even when you’re dealing with economic hardship or are troubled by the economy, it’s important to keep your savings strategy on track and keep contributing to your 401k account. 401k plans are designed to provide you with financial security when you are no longer able to earn an income with a regular job. Whether you choose to retire early or are planning for a standard retirement, it’s important to set up a 401k contribution plan and savings strategy that works for you in the long-term.

For many people who are employed full-time, the 401k account is already set up and their company is contributing to the account along with their regular contributions. Those who are self-employed or want more control over their 401k account will need to seek out the help of a financial advisor so that they are making the right choices with their investment strategy.

Here are some important tips for keeping your 401k on track:

1. Contribute more when your income goes up. If you get a salary increase at any point in your career, make larger contributions to your 401k. Some employees are subject to automatic increases for their 401k plan contributions when they get a raise, so find out if you are eligible for this by checking with your human resources representative. If the increase is not automatic, you will need to contribute more individually. Talk to a financial advisor on what this process entails so that you don’t miss out on the opportunity to build up your savings account.
2. Consider building your portfolio on your own. If you’re willing to take some time to learn about your investment portfolio, learn about the different investment options available to you so that you are making the best choices with your savings account. Sometimes the “default” options aren’t enough to prepare you for a comfortable retirement, so you may need to explore other types of accounts and investments. Talk to a financial advisor to learn more about your options.
3. Don’t withdraw money from your 401k at any time. Taking money out of your 401k account prematurely can prevent you from getting the highest return on your investment. Do whatever you can to avoid having to withdraw from your 401k account or you could end up paying high fees and a tax penalty on the balance. Consider as many alternatives as you can for coming up with cash you need, and protect your 401k.

Tags: 401k basics, 401k tips

How to Manage Your 401k and Protect Your Investment

Contributing to your 401k regularly puts you in an attractive financial position and may help you look forward to a comfortable retirement. However, not everyone is able to manage their 401k successfully and protect their investment for the long term.

If your 401k account was set up by your employer, you may be like many employees who don’t have any knowledge of investing, and you may be vulnerable to making some financial mistakes. Here are some tips for managing and protecting your 401k investment:

1. Get help from a financial advisor. Many people overlook the benefit of speaking with a financial advisor about their 401k plans. Even though this type of retirement plan is self-managed, you don’t have to make all the financial decisions on your own. Seek help from a certified financial planner or investment advisor so that they can help you plan your investment decisions for the oncoming years.

2. Review your investments at the end of each quarter. Get into the habit of meeting with your financial advisor to take a close look at your investment portfolio, and see how your investments are performing at least once each quarter. Some people get caught up in monitoring their stocks on a daily basis, but those daily fluctuations won’t have much of a long-term impact. Checking in a few times per year will help you make the best decisions about reallocating your funds to stocks and other investments if needed.

3. Don’t put off your contributions. It can be tempting to avoid making contributions to your 401k, but you need to keep making contributions and avoid putting it off for an extended period of time. There really is no ‘ideal’ time to invest, so you just need to make sure you are investing as much as possible with each paycheck – or on a monthly basis.

4. Avoid borrowing money from your 401k. Protect your 401k investment for the long term so that you  can earn the highest possible return when you retire. If you withdraw from your 401k early, you will be responsible for paying high fees for the withdrawal and taxes on the amount of the withdrawal. Avoid the high costs and penalties by keeping the funds in your account for the full length of the investment. Congress mandates that everyone pays a 10 percent penalty if they withdraw from a 401k before they reach the age of 59 ½.

5. Remember that it’s a long-term investment. Your 401k is a long-term investment, not a stock fund or money market account. The only way you are going to reap the rewards of your investment is to leave it untouched and keep making frequent contributions. Keep that in mind as you make your financial decisions.

Tags: 401k, 401k advice, 401k basics, retirement plans

401k to Roth IRA Rollover

If you choose to move money out of a 401K plan, no matter where it is going, you will have to face tax consequences. This is particularly true when you are rolling over into a Roth IRA, because a Roth IRA uses after tax dollars while 401K dollars are not initially taxed.

Avoiding tax penalties

You will have a narrow window of time to avoid these penalties. Once your company sends you a check for the funds in your 401K, you will have to pay taxes on the funds. 20% of your 401K balance will be due in taxes as soon as the check is cut. Instead of choosing this option, it is better to roll your funds into a new 401K or a traditional IRA to avoid tax penalties. Traditional IRA accounts do not assess taxes on contributions prior to their withdrawal. Even if you are planning on keeping the money in a new traditional IRA, you will owe the 20% plus an additional fee of 10% for the early withdrawal.

Setting up a direct rollover is the only way to truly avoid paying the big tax bill and penalties. Instead of receiving a check personally for your 401K funds, you will need to have the check made out to the new retirement account. Your new advisor should be able to provide you with exact instructions to do this. You will have about 2 months to deposit the check into your new account.

Paying taxes to elect a Roth IRA

If you are moving your funds into a Roth IRA, then there is no way to totally avoid the tax penalty. This is because your 401K was based on a deferred tax structure, allowing you to only pay taxes when you withdrew from the account. Your new Roth IRA is different, and it requires you pay the taxes up front. You will only be taxed once on this plan. However, if you have a large lump sum, you should be careful to avoid moving into a higher tax bracket.

If you are considering using funds from your 401K rollover to cover the tax charges, think again. When you do this, you are penalized the 10% fee for an early withdrawal; as of 2009, you cannot begin withdrawing until you are 59 1/2 years of age. Anytime you take funds out of your 401K before that age, you will have to pay the 10% penalty. The good news is: there is no penalty for withdrawing early from your Roth IRA. However, the funds in your Roth IRA are allowed to grow tax-free. You are only taxed once, at the moment you receive the funds as income from your employer, and then they are allowed to continue earning money through investments without counting toward your income each year thereafter. If you take the money out of your Roth account and place them elsewhere, you will not be able to capitalize on the tax advantages of leaving the funds to grow.

Tags: 401k basics, retirement plan taxes, roth ira

Roth IRA vs. 401K: Which is better?

The Roth IRA option has become popular over the previous years owing to some advantages over the 401K retirement plan. However, both options are essentially good choices to save for retirement. Depending on your strategy and your family’s strategy, one option may have advantages over the other.

Key differences

There are a few fundamental differences between these two options. First, a Roth IRA allows individuals to contribute post-tax dollars, meaning you will already be assessed an income tax on the  money you contribute. Once you retire, since the funds have already been taxed, you will not have to pay taxes on your withdrawals. 401K plans are the opposite: no taxes up front, but you pay taxes when you withdraw. Other differences include:

• 401K has higher contribution limit
• 401K has minimum retirement age, Roth does not
• 401K has mandatory withdrawal period, Roth does not
• 401K plans force you to stop contributing when you leave your employer, Roth does not

Scenarios for advantages

Tax bracket changes

Depending on your expected taxes, you will be able to decide which option may be better for you. A young professional with a low income may be taxed at a low rate early in their career and a higher rate later. In this case, you will likely save on taxes if you invest in a Roth IRA. You will likely max out your contributions to a Roth IRA rather quickly, and then you can contribute other funds into a 401K after this point. In the end, you will still save on taxes over time. It is easy to aim for the 401K at a young age because you will be tempted to take the tax-free option. Long-term, however, paying the taxes now makes more sense.  The whole point of investing in a 401K or Roth IRA is to think long-term. These funds will not be used within the next 5 or 10 years, they are yours to use as you leave the workforce and aim to have the retirement you have planned for your entire life. As taxes generally trend in the upward direction each year, paying the taxes now simply makes better long-term sense.

Employer contributions

Your company may offer to match contributions to a 4091K plan up to a certain amount. Investing anything less than that amount is essentially throwing away paychecks each year. For example, if your employer offers a 6% match on your 401K contributions, then you can increase your salary by 6% on any given year just by saving money. If you are making $60,000, that 6% is $3,600 each year in extra funds. This amounts to an extra $75 each week you work, or nearly a half a day’s work. Your employer considers a total compensation package when determining your salary each year. This includes benefits like medical care and retirement plans. When you elect to forego one of these benefits, you are willingly lowering your compensation. Your employer will not offer to simply give you this money in cash each year; you will have to completely turn the funds down if you do not place the maximum contribution in your 401K.

Tags: 401k basics, retirement plan taxes, roth ira

401k Retirement Plan: Disadvantages

401K plans offered by your employers provide you with an option to set aside pre-tax dollars to support your retirement. These contributions grow both through employer-matching and through smart investment. Many people do not see the downsides to 401K contributions, but there are a few key disadvantages to be aware of.

401k plans are not flexible

Your 401K plan is governed by two separate sets of rules. The first is set by your employer. Your employer will set a maximum contribution amount and a maximum match amount. The contribution is how much of your paycheck can be allocated to your 401K savings each month. Your match maximum is how much your employer will additionally put into your account each year. Essentially, you will never be able to exceed these numbers, and you will not have ultimate control over how much you deposit. The government also sets similar requirements each year. There is a maximum yearly deposit any person can make; in 2009, this maximum is just over $16,000.

Aside from these limits, you will also be told if and when you can withdraw monies from your savings. If you deposit money into a traditional savings account, you can use the funds in case an emergency occurs prior to your retirement. If you have to use your 401K funds, you will face a penalty for withdrawing any funds prior to retirement.

401K funds are not self-managed

Your company will elect a financial planner to manage 401K funds on its behalf. If you are self-employed, you may elect your own 401K financial manager. Most people, though, have to go along with the choices of their employer. This means someone you did not meet with, choose or possibly do not even know will be making the decisions on how to invest your hard-earned dollars. Many people are okay with this, but you may not be. All you will receive is a statement on a monthly or quarterly basis telling you if your fund has grown or shrunk. You will not be able to ask questions about the financial decisions, and you will not be able to leave your financial advisor if you are dissatisfied. These decisions are made at the employer-level, and you have to go along with the decisions of your executive committee if you want to use the 401K option they provide.

Not all 401K dollars are safe from bankruptcy

If you contribute to a 401K plan with your employer, you could lose some of your funds if the company goes bankrupt. Thankfully, all contributions made before the bankruptcy will be protected. Unfortunately, though, if your deposit has not hit the account yet, it will be at risk. It can take up to 15 days for these funds to be deposited. Further, your employer does not make contributions on a regular basis. Many companies will do this semi-annually or quarterly. If this contribution match has not hit your account before the bankruptcy, then it will be lost to creditors in the bankruptcy filing.

Tags: 401k advice, 401k basics, 401k disadvantages, 401k rules

401K Retirement Plans: Advantages

When you are considering how to plan for your retirement, you should consider contributing to your company’s 401K plan. A 401K is a retirement savings plan offered by a number of different corporations with the help of financial companies. There are some basic facts to understand about a 401K in order to weigh the choice against other retirement savings plans.

401K Contributions are Tax Free

The main advantage to electing a 401K plan over other savings options is the benefit of tax deferral. Tax deferral simply means you are not paying taxes on the funds until you take them out of the account. With a savings account, you are placing funds into a bank or other location after they have already been taxed. You are then taxed as those funds continue to grow on your earnings. With a 401K, you are placing pre-tax dollars into the account. You will not have to pay taxes on this money until you take it out of the account, meaning it will continue to grow, tax free, until you need to use the money.

401K Contributions may be Employer Matched

Your salary as an employee is more than just your monthly paycheck. A salary is a combination of pay, benefits and other office perks. Benefits include healthcare and dental coverage. Other benefits may be a car allowance or paid parking. One of the biggest benefits offered by your employer is likely a 401K match option. When you elect to place a portion of your pre-tax salary into a 401K provided through your company, your company may match up to a certain percentage of that money. Typically, a company will match between 3-10% of a 401K contribution. This is extra money your employer is willing to pay you each month, and if you do not contribute the maximum amount, you are simply leaving the money on the table. With a 401K, you can raise your salary up to 10% each year by simply withholding pre-tax dollars from your paycheck. Individuals who elect not to use this option are turning away valuable funds each year.

401K Funds are Protected

Even if your company  goes bankrupt, your retirement savings may be partially protected. Any contributions you made prior to the bankruptcy declaration should be protected. Fully vested contributions from your employer will also be protected. There are only a few circumstances that will lead to a loss of funds with bankruptcy. First, you may lose the funds if your employer has not deposited them prior to declaring bankruptcy. The government mandates your employer to make the contributions as soon as possible, and they are usually deposited within 15 days. Typically, only one paycheck’s worth of contributions would be affected in this situation. Second, your employer may not have made a contribution match to your fund yet. Your employer does not match funds every paycheck. Instead, most companies make the contributions quarterly or even annually. If the deposit has not been made, then those funds may be seized in a bankruptcy filing, and you will not benefit from the contributions that have not been made.

Tags: 401K advantages, 401k advice, 401k basics, 401k rules